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Thursday, July 24, 2008

Several followups to yesterday's post on the tax policy debate between the Obama and McCain economic policy advisers:

1) Around the blogosphere I've seen people fault Goolsbee for not offering a detailed accounting of Obama's spending proposals, when the question came up at the end of the Q&A. Contrary to other reports, he didn't duck the question. He said three things: a) he couldn't give an exact projected deficit figure under the Obama proposals off the top of his head, b) nevertheless, the nominal deficit in 2013 under Obama's proposals would be less than in 2009, and c) for the forum on tax policy he came with numbers in hand to talk about taxes, but he would be very happy to come back to the Urban Institute for a forum on the candidates' spending proposals.

2) It is flabbergasting that some policy wonks and journalists treat what McCain and company say about fiscal policy as if they were serious attempts to grapple with policy. You could take all of Obama's tax and spending proposals and enact them tomorrow and the sun would continue to rise and set every day, and the world would be a better place. But if you tried to actually do something like what McCain has said he will do to the tax system, and balance the budget by 2013, as be insists he will do, ... well, we don't know because these proposalsare truly unthinkable. The only way he could make these promises add up would to largely dismantle Medicare and Social Security, while continuing to collect the payroll tax dedicated to the programs. It is inconceivable that Americans would stand for this. So, we know with certainty that McCain's proposals will never be enacted and simply cannot be taken at face value. So what was Goolsbee to do? Just engaging in a polite side-by-side discussion of the two candidates' proposals risks giving the false impression that McCain has a proposal worthy of critique. Goolsbee took the only tack available to him, with a frontal, take-no-prisoners assault on McCain's proposals. To his immense credit, Goolsbee was able to rhetorically shred McCain's program while still coming across as a good-natured guy.

3) TaxVox's Howard Gleckman is one of those wonks who's gives McCain far more credit than he's due, by way of his "pox on both their houses" analysis. In this post, he says that "McCain’s primary policy goal is economic growth, Obama’s is progressivity." Leaving aside whether this is an accurate characterization of Obama's primary tax policy goal, the difference is that Obama's goal would clearly be achieved by his plan, while McCain's goal--even in some bizarro alternative universe where he was able to put all his proposals in place--has no relation to his "plan." To the contrary, actually trying to implement the McCain proposal would spell doom for the economy. Taking him at his word (see #2 above), he's going to balance the budget by 2013. This would amount to a huge contractionary swing during a period when the economy is struggling to pull out of a possibly severe recession. Whatever the possible merits of a balanced budget, now is not the moment to be pushing to achieve one in the near term. Let's say we pretend that McCain didn't promise to balance the budget--then his program would be if anything a net negative for growth over the long term. While some research suggests that lower taxes paired with lower spending promotes growth (although this depends on particular circumstances, etc.), there is NO evidence for the proposition that tax cuts financed by debt promote growth.

Thats all I have for the time being. I'll be on vacation for the next week and a half, soaking up some sun and tackling my first triathlon. Hopefully some of my colleagues will man the store while I'm gone.

No pistols were drawn, and no punches were thrown, but Holtz-Eakin did look worse for wear by the end of it. First, Burman gave a fairly dry summary of the Tax Policy Centers (TPC) latest analysis of the plans. Then Goolsbee gave what I thought was a devastating presentation, chiefly a summary of the highlights of Jason Furman's latest critique of the McCain proposal. (This critique is based on the TPC's most recent numbers). I could see why Goolsbee was a debate champion in his student days. He sat a couple feet from Holtz-Eakin, and with passion and precision explained why the tax plan Holtz-Eakin was there to represent was complete BS.

He framed his presentation by saying that there were three problems with the Bush tax program:

It was fiscally irresponsible, creating a huge sea of red ink.

It was sold using budget gimmickry.

It was massively tilted toward the rich.

On all three points, he showed that the McCain program is worse. In his words, it would create deficits that are twice as big and is twice as regressive.

One of his strongest points was when he said (paraphrasing), if we take McCain at his word and accept that he's going to implement all the tax cuts he's calling for AND his promise to balance the budget by 2013, the only possible conclusion is that he will have to cut Social Security and Medicare by 60%, all but dismantling the programs.

He also highlighted the fact that the headline analysis by the TPC, which is based on Holtz-Eakin's representation of McCain's proposals, doesn't even include another $2.8 trillion of lost revenue (over ten years) for the policies that McCain has in his stump speech. During the Q&A, Holtz-Eakin objected to this figure, until Goolsbee showed him that it appears in an addendum table (R4) to the TPC analysis.

Goolsbee practically begged the assembled crowd of policy geeks and journalists to call out the campaign on the complete insanity of the McCain proposals. He said (paraphrasing again) that if the ludicrous McCain proposals are accepted as a serious plan, no one will offer a meaningful campaign tax proposal ever again.

When Goolsbee wrapped up, there was a moment of silence as the audience held its collective breath, wondering how Holtz-Eakin would respond. Would he actually defend the indefensible? Or would he break down into tears and beg forgiveness? Coat his body in tax tables and light himself on fire? Or run out of the room screaming, "I can't take it anymore, all the lies, all the evil! I just want to go home to academia!"

Instead, Holtz-Eakin said, well, "Taxes aren't everything" (actual quote, at a debate on tax policy) and talked up McCain's proposals on the environment and renewable energy. Rather than make any attempt to rebut Goolsbee's takedown, he argued that reducing taxes increases growth and that the spending side needs to be considered as well. Of course it was pointed out that there is no evidence that tax cuts financed by deficits do anything for growth, and that McCain hasn't identified any major spending cuts beyond some pocket change from earmarks and vague "entitlement reform." Somehow, Holtz-Eakin managed to get away without offering any counter to Goolsbee's critique.

At the end, Burman announced that Goolsbee and Holtz-Eakin will be back for a rematch, with another forum to talk about the spending side of the equation at some point before the election. I'll be there!

Correction: In the original version of this post I saidthat the extra cost of McCain's plans, above and beyond Holtz-Eakin's representation of the proopsals, would be $2.8 trillion over four years. I was misreading the relevant table--it's $2.8 trillion over TEN years, and I have corrected the post to reflect this.

I'm at an Urban Institute event where the candidates' economic advisors will debate their tax proposals. It should make for some juicy drama, or at least as juicy as it can get between two econ Ph.Ds. More later.

Monday, July 21, 2008

I'm blogging from the National Mall in front of the U.S. Capitol at this week's "Screen on the Green" event, where I'm watching "The Candidate," a superb movie starring Robert Redford as an idealistic guy running for Senate in California, torn between being true to himself and letting the consultants market him. It's uncanny how much candidate Redford's message and speech cadence sounds like Obama. Redford's character promises to fight against the special interests and even says "It's not about black versus white, rich versus poor." Redford's much older opponent also bears a more than passing resemblance to McCain. Redford, by the way, wins the race.

I've been on the road for what feels like forever, which helps explain my paucity of posts. Glad to see that Donpedro has kept the fire burning hear at E4O.

This one isn't about economics per se, but instead about common sense.*

John McCain has been telling anyone who'll quote him that it's a colossal sin that Barack Obama formulated his Iraq policy before he even went to Iraq! I'd thought that this criticism was so self-evidently ridiculous that McCain would be made fun of and then stop making it. But it seems I was wrong. Since McCain's criticism has been reported widely and mocked little (if at all), perhaps its silliness bears some explaining. But first, let's consider some analogical examples:

I have always wished to own a Ferrari. I like flashy high-performance cars, and everyone knows that Ferraris are among the best. But few people, including I, have ever actually driven a Ferrari. Apparently, everyone would be roundly rebuked by John McCain for formulating a Ferrari-liking policy before ever driving one!

I live in the Sonoran desert of Arizona, where Black Widows and the Arizona Brown spider are relatively common. Since moving to Arizona, I have tried hard to avoid being bitten by one of these spiders, since their bites are known to be painful and potentially disfiguring or fatal. But since few people have ever been bitten by these species of spider, John McCain would mock me for wanting to avoid Black Widow/Arizona Brown bites before even being bitten!

I believe that John McCain's gas-tax holiday proposal is really silly, because I believe that it would make very little difference to the gas prices consumers pay while also depleting the Federal Highway Trust Fund. But now I realize that John McCain would mock me for thinking this before I've ever visited the Federal Highway Trust Fund!

I'm not a supporter of ethanol subsidies, a policy that Barack Obama has supported. But come to think of it, John McCain would mock me for opposing Barack Obama's position before I've ever visited an ethanol refinery!

Ok, enough with the examples. Hopefully by now the silliness of McCain's criticism is clear. All of these examples involve cases in which reasonable people can come to beliefs about the world in ways other than direct observation: I've seen Ferraris drive by and have read about their high performance; I've seen pictures of poisonous spider bites; I'm an economist and understand how markets work and so know what the effects of the gas-tax holiday would be; I'm an economist who reads newspapers and thus understand that ethanol subsidies both are likely to and appear to have had some bad effects. In these examples, personal observation or experience is either unnecessary, undesirable, or beside the point.

In some cases, personal observation or experience can be very helpful to formulating a position (turns out I really like the arugula in Italy -- hard to know this without trying it). In others it is beside the point.

Iraq/Afghanistan policy is much closer to the latter case than the former. One can learn lots of information by reading the news, reading blogs, and even by using, say, the laws of reason. No doubt, as a sitting U.S. Senator and presumptive major-party presidential nominee, Barack Obama has access to even better sources of information that these! Can any reasonable person seriously believe that a scripted, days-long trip to the region is more important than his using those sources effectively over an extended period of time?

I do not mean to suggest that Obama's trip to Afghanistan and Iraq (as well as other countries) is or necessarily has to be useless. Indeed, there is much to recommend such a trip. However, a day -- or even a few days -- doing canned visits to and meetings with foreign politicians, American troops and (say, in McCain's case) dangerous open-air markets with a regiment of U.S. Marines and air support strikes me as a particularly unreasonable sole basis for policymaking.

If you think I am wrong, then please tell me:

Do you have views about appropriate policies for Iraq/Afghanistan? Have you failed to visit Iraq/Afghanistan? If you answered "yes" to each question and think McCain has a point, then please deride the person in the mirror when you brush your teeth tonight.

Will pro-long-term-American-presence pundits who have never been to Iraq withdraw their stated positions and declare their own incompetence to prognosticate?

How frequently must politicians attend Iraq visits to be qualified to propose and make policy, i.e., what is the half-life on such visits? Where can I find out who qualifies so that I can ignore the others?

*Ok, it is true that I think economics is largely about common sense. Or, at least, that's what my forthcoming co-authored textbook will claim.

Sunday, July 20, 2008

I noted in an earlier post that McCain has claimed that tax cuts increase government revenue (and conversely, increasing taxes reduces government revenue.) This view is clearly false, and when I confronted McCain's chief economic adviser about this at a public forum, he denied that McCain held this view, saying that McCain had mispoke and was being "too blunt."

A couple days ago the Center on Budget and Policy Priorities put together a nice note summarizing why tax cuts lose revenue. This is a good reference for anyone trying to explain why McCain is wrong. A key excerpt:

Given the evidence, economists across the political spectrum reject the notion that tax cuts pay for themselves. They include Edward Lazear, current chairman of President Bush’s Council of Economic Advisers (who told Congress, “I certainly would not claim that tax cuts pay for themselves”) and N. Gregory Mankiw, the CEA chair earlier in President Bush’s administration (who once compared an economist who says that tax cuts pay for themselves to a “snake oil salesman trying to sell a miracle cure”).

As it turns out, McCain recently confirmed that he is lying or misinformed about this issue. Here's an excerpt from a July 8 interview with CNN's John Roberts:

ROBERTS: ... Senator McCain says he wants to balance the budget by the year 2013... I check the Center on Budget and Policy Priorities, a non-partisan organization yesterday. They project that by extending the President's tax cuts, which you want to do, and adding in the tax cuts that you're proposing, the deficit for the year 2013 will be somewhere around $439 to $445 billion. So I think it's a fair question to ask, how would you get that number down to zero?

MCCAIN: Well, first, I suggest you check in with other organizations. But the fact is there's a whole lot of economists, including noble laureates who agree with my plan. We're going to reach restrained spending, we're going to have the economy grow again and increase revenues....

ROBERTS: Actually, I also checked with the Congressional Budget Office and the Center for Budget and Policy Priority numbers were more conservative, they were lower than the CBO's numbers. The CBO's numbers are higher but the number that you have -

MCCAIN: Again, they're static numbers. Not saying that revenues will increase with a strong economy and with low taxes. That's the difference. And I respectfully disagree.

ROBERTS: But Senator, you can't get over the fact, though, that extending the Bush tax cuts, as you want to do, and adding in your tax cuts do take the deficit number from - we actually go from a $70 billion surplus to a $445 billion deficit. So, it's those tax cuts.

MCCAIN: You can't seem to get over the fact that it's spending that's out of control. And you restrain spending and also you can't get over the fact that historically when you raise people's taxes, revenue goes down. Every time we cut capital gains taxes, there has been an increase in revenues.

Capital gains rate cuts, like other tax cuts, lower revenue in the long run. Especially when a capital gains cut is temporary, like the 2003 cut, investors have a strong incentive to realize their capital gains before the old, higher rate returns. This can cause a short-term increase in revenues, as happened after 2003. (Capital gains realizations also went up after 2003 because of the increase in the U.S. stock market. The capital gains tax cut cannot take credit for the stock market recovery, though, since European stocks performed just as well as U.S. stocks during this period.)

Over the long run, however, there is virtually no evidence that cutting capital gains taxes spurs nearly enough economic growth to pay for itself. As the Congressional Budget Office recently stated, the “best estimates of taxpayers’ response to changes in the capital gains tax rates do not suggest a large revenue increase from additional realizations of capital gains — and certainly not an increase large enough to offset the losses from lower rates.”

Kudos to CNN's Roberts for confronting McCain on the fact that his proposed tax cuts which plunge the nation into debt. But next time, please point out that no one, not even McCain's own advisers, believe that cutting taxes will raise revenue.

In his column today, Frank Rich reviews the misadventures of McCain's economic policy and speculates on Romney vs. Michael Bloomberg as McCain's VP pick. Not that I'm in the business of offering advice to the McCain camp, but I think Rich is right that Bloomberg would be a smart choice. McCain is desperate at this point; Intrade shows him with only a 30.5% shot at being the next president. He needs to do something to shake up the race, and picking Bloomberg would fit that bill.

Sunday, July 13, 2008

I've been offered a spot at the Big Tent new media center next door to the Democratic Convention hall in Denver, and so I plan to be there. Note that there will sponsor-provided free beer, which may affect the quality of my economic analysis during the convention.

Saturday, July 12, 2008

My bank failed yesterday. OK, I shouldn't be too dramatic about it: Indymac, where I had a non-negligible portion of my savings temporarily stashed in a 120-day CD, was seized by the FDIC. Thanks to the Glass-Steagall Act of 1933, the full value of my deposit (which is less than $100K) is insured, and according to the message on the bank's website, I'll be able to access my account on Monday.

Two sets of questions:1) Why did people rush to withdraw their funds after Sen. Chuck Schumer indicated in a letter that the bank might fail? I'm guessing that the premature withdrawers are not chiefly those few with deposits over the insured limit. Do these people not realize that their deposits are insured? Or do they know they're insured but have lost confidence in the government, post-Katrina/Iraq/everything the government has done the last seven years? Or is a herd behavior model the only way to understand this?

2) What was Schumer thinking? Did he not suspect that a senator saying that a bank could fail might cause a run on the bank? Did he want the bank to fail? I have the sneaking suspicion his letter is not entirely delinked from campaign money. Are the bank's competitors perhaps big sources of campaign funds for Schumer? I'd like to know, but am heading out the door to see WALL-E right now and don't have time to do my own research. From a very quick look, I see that top 5 Schumer contributing companies are Goldman Sachs, Citigroup, JP Morgan Chase, Credit Suisse First Boston, and Morgan Stanley.

Galbraith yesterday reprinted his review of Phil Gramm's dissertation. Though Jamie declines to interpret the dissertation in light of Gramm's later performance in public life, I won't shirk from that duty. If you're an economist who doesn't believe in empirical work--as is apparently the case with Gramm--all you've really got to go on is ideology (and who gives you the biggest campaign contribution.) I remember when Gramm tried to run for president and blamed his poor performance on anti-Southern bias in the media, neglecting the more obvious explanation, which was that he is about as charismatic as a foot fungus. I'm happy to see that he's putting his charm skills to work again for McCain!

Senior policy advisers Austan Goolsbee of the Obama campaign and Douglas Holtz-Eakin of the McCain campaign will make the case for their candidates’ tax plans in a lively exchange moderated by Urban Institute President Robert Reischauer. The event, hosted by the Tax Policy Center, will begin with an updated and expanded analysis of the candidates’ tax proposals by TPC Director Len Burman. Participants will address questions from the audience.

A reader asked what I thought of this radio interview with McCain's main economic policy adviser:

I don't recommend a listen, since this is a "friendly" interview, and the interviewer doesn't ask press Holtz-Eakin on much. The one interesting moment is when Holtz-Eakin is asked why should taxes be cut in time of war, and the interviewer follows up with, "but he wants to see more American troops in Iraq longer presumably than Senator Obama, right?"

Amazingly, Holtz-Eakin denies the truth of this statement--perhaps the clearest single difference between the candidates. This section starts about minute 5.

Wednesday, July 9, 2008

I recall meeting reporter Nedra Pickler during the Dean campaign. She was well-known on the campaign for her articles which presented non-contradictions that at first seemed like absurdist jokes, statements like "But when he criticizes Bush's links to Lay, Dean never mentions that Enron's mismanagement was not the result of the president's tax-cut package."

She seemed quite nice in person, but not that bright, and from talking with her I was left with the sense that she just didn't understand why sentences like the above didn't make sense.

Today she has an AP article which says "Barack Obama says John McCain's plan to balance the budget doesn't add up. Easy for him to say: It's not a goal he's even trying to reach."

The rest of the article typifies the he-said, she-said policy article that makes my head explode. A reasonable intelligent person reading the article would not come away understanding that McCain's "plan to balance the budget" has as much connection to reality as my plans to play starting forward for Italy in the next World Cup, or the Underpants Gnomes' plan to make their fortune by gathering boxers and briefs.

Which all makes me wonder how anyone imagined it was a good idea to have Nedra writing about economics. I'm sure she could write fine stories about topics like trends in pet fashion this year, or how to buy a bowling ball. Please, AP, keep her away from policy!

Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that’s a disgrace. It’s an absolute disgrace, and it’s got to be fixed.

As Dean correctly points out,

Of course present-day retirees have always been paid their benefits from the taxes paid by current workers. That has been true from Social Security’s inception.

I’d guess that there are three things going on here.

First, McCain has no idea how Social Security works. That may sound hard to believe, but not to anyone who has spent any time in or around the federal government. Politicians, by and large, get where they are mainly by looking and sounding good; this may or may not go along with any actual understanding of governing.

Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.

Finally, McCain has surrounded himself with people who hate Social Security. They probably tell him that it’s a doomed Ponzi scheme, and he believes them.

I've been working on putting together the e-mail addresses for many of the economists who signed a letter in support of McCain, with plans to write them and get a dialogue going on some of the points raised the letter. I was surprised to read that the Politico called several of them and found that their support for McCain's agenda is tepid, with one even saying that he supports Obama!

Monday, July 7, 2008

Earlier this year, Senator John McCain said that the nation had made “great progress economically” under the leadership of George W. Bush. On the eve of John McCain’s “Jobs First” economic tour this week, one thing is clear: the McCain economic plan represents a continuation of the same economic policies we have seen for the past eight years.

As currently constructed the McCain plan does not address the immediate challenges facing our economy, like the 438,000 jobs that have been lost in the past six months, the 400 percent increase in the cost of gas at the pump, and a massive contraction in the housing market. The McCain plan offers no hope of relieving burdens for middle-class families struggling with wages that have been stagnant for a generation and household incomes that have fallen $962 in this economic “expansion.” Instead, the McCain plan would continue the economic policies of the last eight years that have added $4.0 trillion to the deficit, primarily with tax cuts for the wealthiest 2 percent of Americans who did not need and did not ask for them. Indeed, McCain’s plan proposes to double down on these policies, with tax cuts that are more expensive and stacked against average Americans than anything President Bush has ever proposed.

According to the Wall Street Journal, the McCain campaign plans to spend the week “repackag[ing] proposals he has already outlined” rather than improving on their economic plan. But no amount of repackaging can alter three basic facts about the McCain plan:

1. Senator McCain has no plan for immediate fiscal stimulus to help struggling families or jumpstart our economy. In January Senator McCain said the economy was not slipping into recession and said he was “skeptical” about the stimulus measures being considered. His top economic adviser said stimulus plans were typically unnecessary “junk.” That same month Barack Obama proposed a fiscal stimulus plan centered on rebates to workers and seniors, a package similar to what was ultimately passed on a bipartisan basis. At the same time, Senator Obama warned that if the economy worsened further another round of stimulus would be needed. On June 9th, Senator Obama called for a second stimulus, with at least $50 billion in immediate measures to help jumpstart our economy. On July 3, in the wake of news that our economy has now lost jobs for six straight months, Senator Obama asked Senator McCain to join him in passing an immediate stimulus plan. However, since January when John McCain announced during a debate that he thought Americans were better off because of George Bush’s economic policies, he has failed to propose any immediate measure to give our economy shot in the arm by putting more money in the pockets of Americans hit hardest by the downturn.

2. The McCain tax cut plan completely leaves out 101 million households – including those working and middle-class Americans hardest hit by this downturn. In contrast, Senator Obama’s plan benefits 95 percent of workers and their families. The principal middle class tax cut proposed by John McCain is an increase in the dependent exemption that will not be fully in effect until 2016. Most households without children would see nothing under the plan – a total of 101 million households, including 67 million households currently paying income taxes but who would not benefit because they have no dependents, and 34 million low-income households with no income tax liability but generally paying payroll taxes. Nearly all seniors (37 million out of 38 million) would be left out. Even for families with children, the increase in the dependent exemption provides only a modest tax cut. In the first year of the plan, it would be worth about $125 to a middle-class family with two children. That same family would eventually see their taxes increase under the McCain plan, because his health care plan would raise taxes on middle-class families over time. This is completely inadequate, and will not help the very people whose reduced spending is contributing to our slowing economy. The Obama plan offers more generous tax relief for middle class families, including a “Making Work Pay Credit” that would benefit 95 percent of workers and their families, providing $1,000 for a typical working family. Obama’s plan would also expand tax credits to help families save, send a child to college, pay for childcare, and afford their mortgage, while eliminating income taxes for all seniors making less than $50,000.

3. McCain’s plan continues the Bush policies of tax cuts that are not paid for, which will push our deficits higher and further weaken our economy. His plan continues giving tax cuts to those who need them least and didn’t ask for them, including the wealthiest 2 percent of households and large corporations – including big oil which gets $4 billion in new tax breaks from John McCain. Although economists generally agree that short-run stimulus measures should not be paid for, it is critical that sustained policies like middle-class tax cuts be paid for in order to avoid economic damage in the short run and inevitable tax increases in the future. Currently, McCain’s budget plan “will add $200 billion to $300 billion or, depending on his voluntary tax system, even more” annually to the deficit according to the New York Times. If McCain cut back on his more than $100 billion in annual corporate tax cuts – including $1.2 billion for Exxon-Mobil alone – plus other tax cuts for the most affluent, he could afford to pay for more tax cuts for middle class families.

1. Senator McCain does not have an immediate plan to jumpstart our economy, and has failed to support Barack Obama’s fiscal stimulus plan.

In this campaign, Senator McCain and I are having a robust discussion about our different visions for what we’ll do as president. But when it comes to creating jobs and brokering relief for families who are struggling, we can’t wait six months for the next president, and that’s why today I’m calling on Senator McCain and all members of Congress, to come together and support this 50 billion dollar stimulus package. Let’s show the American people that we can come together, Republicans and Democrats, to ease the burden on working families let’s not wait another 6 months for more bad news.- Barack Obama in Fargo North Dakota, July 3, 2004

The economy is facing a serious downturn: Our economy has lost 438,000 jobs in 2008, six straight months of job loss. In May, the unemployment rate jumped from 5.0 percent to 5.5 percent – the largest once month increase in more than 22 years. Our housing market continues to deteriorate and consumer expectations for the future have fallen to the lowest levels ever recorded. Experts from Lawrence Summers to Robert Shiller agree that another round of fiscal stimulus is warranted.

John McCain missed the chance to push for the first stimulus: John McCain already missed the chance to push for the first round of stimulus. In a debate on January 10th, McCain said “I don’t believe we’re headed into a recession. I believe the fundamentals of this economy are strong, and I believe they will remain strong” and went on to argue that spending reductions were needed to help the economy. That same month, top McCain economic adviser Kevin Hassett said that McCain was “firmly” opposed to sending out fiscal stimulus rebate checks, likening it to “borrowing money from the Chinese and dropping it from helicopters.” At about the same time top economic adviser Douglas Holtz-Eakin said, “that for short-term fluctuations in the economy, the best course of action is to let the Fed handle it” and called the stimulus plan emerging from the President and Congress “junk.” John McCain himself said he was “skeptical” about the fiscal stimulus measures being proposed. In fact, while McCain eventually voted for the final version of the stimulus package, McCain failed to show up for a key vote to expand the relief in the package to 20 million seniors and 250,000 disabled veterans. That expansion was defeated by one vote, and McCain was the only Senator absent. At the time, he explained that he was “too busy” and “focused on other stuff.”

After six months of consecutive job loss, Senator McCain’s economic plan still includes no near-term strategy to help our economy create jobs and provide relief for struggling families. Instead, his “stimulus,” originally announced in late January, is focused on a permanent reduction in the corporate tax rate that would not even be fully effective until 2015. Experts across the political spectrum agree that such a permanent corporate tax cut would do next to nothing to jumpstart our economy in the near-term. The Congressional Budget Office recently found that a cut in the corporate tax rate was among the least cost effective, least fast-acting and least certain approaches to stimulate the economy available to policymakers. Ruth Marcus of the Washington Post graded McCain’s “stimulus” plan as a D+, explaining that McCain “proposes permanent tax cuts – cutting corporate rates, increasing investment breaks, eliminating the alternative minimum tax – masquerading as a stimulus plan.” Since the first stimulus package passed, Senator McCain has not presented any new or additional plans to jumpstart the economy. In April, he told Bloomberg TV that we had made “great progress economically” under the leadership of George W. Bush.

Senator Obama championed the first stimulus and is calling for a second one: In contrast, Senator Obama first proposed a fiscal stimulus centered around sending checks to workers and senior citizens on January 13th. A plan along these lines was agreed to on a bipartisan basis and enacted in February. Obama’s original plan included a contingency that should the jobs situation deteriorate a second round of stimulus would be triggered. On June 9th Obama explicitly called for a second round of stimulus, including at least $50 billion for:

• An additional round of rebate checks for working families to help offset the impact of $4.00 a gallon gas and skyrocketing food, health and college costs;

• A $10 billion Foreclosure Prevention Fund to provide struggling homeowners with pre-foreclosure counseling and refinancing assistance to help them stay in their homes; and

• $10 billion in relief for state and local governments hardest hit by the housing crisis to prevent cuts in services such as health, education and infrastructure.

2. The McCain tax cut plan completely leaves out 101 million households – including virtually all seniors – and provides only $125 in the first year to a family with two children. Eventually the McCain health plan would raise taxes on families. In contrast, Sen. Obama’s plan benefits 95 percent of workers, and provides the typical working family with at least $1,000 in tax cuts.

I will reform our tax code so that it’s simple, fair, and advances opportunity instead of distorting the market by advancing the agenda of some lobbyist or oil company. I’ll shut down the corporate loopholes and tax havens, and I’ll use the money to help pay for a middle-class tax cut that will provide $1,000 of relief to 95 percent of workers and their families. I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills. We’ll also eliminate income taxes for any retiree making less than $50,000 per year, because every senior deserves to live out their life in dignity and respect.- Barack Obama in Raleigh, North Carolina on June 9, 2008

Families are struggling in the economy: We have just gone through the first economic “expansion” on record where typical household income actually fell, by $962 from 2000 to 2006 (the most recent year for which data are available, incomes have likely dropped further since 2006). During this period, the cost of healthcare has increase by 67 percent in inflation adjusted terms, college costs are up 23 percent and the price of gas at the pump has increased by 400 percent. As middle class families have watched the value of their largest financial asset – their homes – plummet by record amounts, they have been left with little margin for error.

John McCain’s “middle class” tax cut leaves most families behind: To put our economy back on track, we must ease this intense financial squeeze on middle class families. Yet John McCain’s tax plan would provide an extraordinarily small amount of upfront relief for middle class families – and would eventually raise their taxes. John McCain’s corporate tax cuts would provide no direct benefit for middle-class families, they would have to hope that a small portion of the benefits trickle down to them. McCain’s plan to repeal the Alternative Minimum Tax (AMT) would provide very little benefit for middle-class families beyond what they are getting from the tax law in place in 2008. Essentially the only tax cut McCain is proposing that would directly benefit middle-class families is his proposal to increase the dependent exemption by $500 a year until the exemption reaches $7,000 in 2016. That proposal would:

• Provide $0 in tax relief to 101 million households. Senator McCain’s dependent exemption increase only benefits taxpayers who can claim dependents on their tax forms (e.g. parents with dependent children). Therefore, single workers or married couples without dependents would receive no benefit from the proposal. Based on an analysis of IRS data, 101 million households would receive $0 in relief under the McCain proposal in 2009. Those households include:

o 67 million households paying income taxes but with no dependents. More than two-thirds of income taxpayers get no benefit.o 34 million households struggling with low income incomes and in many cases paying payroll taxes

• Provide $0 in tax relief to nearly every senior citizen in the United States – 37 million out of 38 million would be left out. Senator McCain’s proposal would not benefit the vast majority of elderly households because they generally do not have children or other dependents. As a result 37 million individuals over 65 would get zero tax relief from the McCain middle-class tax cut.

• Provide $125 in tax relief to a middle-class family with two children in the first year of his plan. The McCain plan promises to increase the dependent exemption that a married couple could claim for each of their two children by $500. However, the dependent exemption would rise by about $90 per year anyway, because the exemption is already indexed to inflation. Therefore, the McCain plan reduces that married couple’s taxable income by about $410 per child –or $820 overall – in the first year of the plan. For a family in the 15 percent income tax bracket, that translates into a $125 tax cut (i.e. $820 multiplied by 0.15).

• Taken as a whole, the McCain plan would raise taxes on middle class families in future years. While the McCain plan increases the dependent exemption between 2010 and 2016, middle class families would actually face higher taxes in later years of the plan. This is because the McCain health care plan finances its new tax credits by requiring individuals to pay taxes on the health insurance premiums they pay. As premiums grow the tax increase that pays for this plan would grow as well. As a result, by 2013 the typical family would pay $1,100 more in taxes from the health plan according to an analysis by the Center for American Progress – more than offsetting any benefit they get from Senator McCain’s middle class tax cut.

Barack Obama is proposing a tax cut for virtually all middle class families: In contrast, Senator Obama has proposed broad middle class tax relief that would provide at least ten times the benefit for typical families in the first year of his plan (see Table 1 below). When the two plans are fully in effect, and ignoring the tax increases Senator McCain proposes to finance his health plan, the nonpartisan Tax Policy Center found that the tax cuts under Obama’s plan are three times larger than the tax cuts under McCain’s plan for families in the middle quintile.

Senator Obama’s Making Work Pay tax cut will provide a tax credit of up to $500 per person, or $1,000 per working family to offset the payroll taxes they pay. This tax cut is fully available in the very first year of his plan. His universal mortgage credit will provide an average tax cut of $500 to 10 million homeowners who do not itemize their taxes. His Automatic Workplace Pension program will expand the existing Savers Credit to match 50 percent of the first $1,000 of savings for families that earn under $75,000, and he will make the tax credit refundable. And he will provide a fully refundable $4,000 tax credit to make college affordable for working families.

Given the record high energy costs, high health care costs and stagnant wages that middle class families face, Senator McCain’s plan to leave out 101 million households, and to provide only $125 a year in tax relief for middle-class families with two children, is simply insufficient to relieve their financial burdens.

Married Couple making $60,000 with two children, one of whom is in college.

$3,700[includes $1000 Making Work Pay tax cut; $500 universal mortgage credit; and $4,000 college credit net of current college credits]

$125Source: Campaign calculations based on IRS Statistics of Income. Obama tax savings does not account for up to $500 in savings from expanded Savers Credit and the $2,500 in savings per family from the Obama healthcare plan.

3. Senator McCain’s tax plan provides a $1.2 billion tax cut for Exxon-Mobil and additional tax cuts for the wealthiest Americans that will drive up the deficit by the at least $200 billion to $300 billion per year.

[McCain] hasn’t detailed how he would pay for this new give-away. There is nothing fiscally conservative about this approach. It will continue to drive up deficits, force us to borrow massively from foreign countries, and shift the burden on to working people today and our children tomorrow. Meanwhile, John McCain will shortchange investments in education, energy and innovation, making the next generation of Americans less able to compete. That’s unacceptable. It’s time to make tough choices so that we have a smarter government that pays its way and makes the right investments for America’s future.- Barack Obama in Flint Michigan, June 16, 2008

The Bush tax cuts have added to the deficit and inequality is growing: Over the last eight years, we have witnessed the most dramatic deterioration in our nation’s finances in history. In January 2001, the Congressional Budget Office projected a $635 billion surplus in 2008. Instead, CBO is now projecting a $357 billion deficit – a nearly $1 trillion swing in a single year. Bush’s tax cuts are the single largest cause of this fiscal deterioration, contributing twice as much as increased defense and homeland security spending. In total CBO data show that policies signed into law by President Bush have added $4.0 trillion to the deficit from 2001 through 2008. Over this period, workers’ wages have stagnated and typical families’ income has fallen by $962. We are experiencing levels of income inequality unrivaled since the 1920s.

The McCain plan would provide tax cuts that work against average, working Americans and add to the deficit: Senator McCain, by his own campaign’s estimates, includes close to $400 billion annually in new tax cuts. But the same candidate who in 2001 said he could not “in good conscience” support the Bush tax cuts because “so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief” has now proposed a new set of tax cuts that are twice as regressive as what President Bush signed into law. Likewise, Senator McCain criticized President Bush for abandoning fiscal discipline by failing to show how he would pay for his tax cuts, explaining “[w]e Republicans, I think, were for balanced budgets and lock boxes.” Yet now, Senator McCain has taken a page out of Bush’s fiscally irresponsible playbook by promoting regressive tax cuts without any credible explanation for how he would pay for them. McCain has repeatedly refused to identify specific spending cuts or tax increases he would support to offset his tax plans ; his top economic advisor recently justified this lack of detail by explaining “it’s just June.”

Although experts agree that a stimulus plan should not be paid for in order to provide the maximum short-run boost for the economy, Senator McCain cannot responsibly scale up his middle-class tax cuts without also scaling back his tax cuts for corporations and the most affluent. Even then, the plan would still leave a large increase in the deficit to be paid for by unspecified future tax increases and reductions in critical programs like Social Security and Medicare.

Some of the current, expensive tax cuts in the McCain plan:

• A $1.2 billion annual tax cut for Exxon-Mobil, $4 billion for the five largest U.S. oil companies combined, and $2 billion for America’s largest health insurance companies;

• More than $100 billion per year for corporations;

• An average tax cut of more than $269,000 per year above and beyond the Bush tax cuts for the top 0.1 percent of households – that is families making over $2.8 million annually.

• Less than one-quarter of the benefits go to the 80 percent of households who make up the bulk of the middle class in America.

In total the New York Times estimated that these proposals “will add $200 billion to $300 billion or, depending on his voluntary tax system, even more” annually to the deficit. Although full details of the McCain tax cuts are not available and there are inconsistent and contradictory descriptions and cost estimates put out by the campaign and others, Table 2 below outlines some illustrative examples of proposals that have been supported by Senator McCain and posted on his website over the course of the campaign.

Barack Obama would pay for his proposals for middle class tax relief: In contrast, Barack Obama has made it a priority throughout this campaign to show how he would pay for all of his proposals without increasing the deficit. He will achieve this by ending the war in Iraq, reducing unnecessary and wasteful government spending, closing corporate and international tax loopholes, and repealing the Bush tax cuts for those making more than $250,000. Independent analyses like the Wall Street Journal has confirmed that Obama’s numbers add up – that his plan will generate enough revenue to pay for his middle class tax cuts, healthcare plan, and other key domestic investments while bringing down the deficit significantly from its current record levels.

Table 2: Estimated Cost of Selected McCain Tax ProposalsAnnual Cost SourceCorporate tax cut $100 billion Wall Street Journal, 3/3/08: “the 71-year-old candidate would slash the corporate income-tax rate from 35 percent to 25 percent at a cost to the Treasury of $100 billion a year, estimates Mr. Holtz-Eakin.”Complete Elimination of the AMT $60 billion McCain Economic Plan: “Repealing this onerous tax will save middle class families nearly $60 billion in a single year.” http://www.johnmccain.com/Informing/Issues/4dbd2cc7-890e-47f1-882f-b8fc4cfecc78.htmIncrease the dependent exemption $18 billion Tax Policy Center, 6/25/08, http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf, p. 13.Eliminate expensing At least $200 billion The U.S. Department of Treasury estimates that a partial expensing proposal under which businesses would be able to expense only 35 percent of new investment would cost $1.3 trillion over ten years. (“Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century,” December 20, 2007, p. 50, http://www.ustreas.gov/press/releases/reports/hp749_approachesstudy.pdf.Gas Tax holiday $10 billion McCain campaign estimate, http://www.johnmccain.com/Informing/News/NewsReleases/1460e6aa-fbb6-4cf5-9241-e5df4f303c8

See the story here. Although I like Webb, I'm not surprised that he pulled himself out of the running. He's an independent guy ("maverick" would be the right term) and not someone who is likely to relish the discipline and spotlight of a national campaign. It's also a bit hard to imagine him enjoying being vice president.

Wednesday, July 2, 2008

It turns out that McCain had the good fortune to be in Colombia the very day that the country had its best news in years. In a sophisticated operation, and without a shot fired, Colombian commandos freed 15 hostages held for years by the FARC guerrillas. The 15 included three Americans, along with Ingrid Betancourt, a French-Colombian politician who had been held for six years.

The timing might lead one to think it was not coincidental. However, it's hard to see how the timing really benefits McCain. McCain acknowledged that he was briefed on the operation by Uribe last night, but I have no reason to doubt he is sincere with his comments:

"These are very high-risk operations," McCain said, adding that he did not know the rescue was being put together before deciding to visit Colombia. "I would remind you that these things require incredibly long planning and coordination, et cetera. There's no way possible that it could have had anything to do with our visit that I could imagine. . . . It's a very happy moment."

On the other hand, his press friends at NBC didn't hesitate to spin this as a positive event for McCain:

The timing didn't hurt the Republican presidential candidate, who has long touted his foreign policy experience as being much stronger than that of Democratic rival Barack Obama.

And Lieberman, who was accompanying McCain, wasn't shy about trying to take advantage of the situation:

"I think it was a sign of confidence of President Uribe and the defense minister in Senator McCain — and maybe in the two of us — that they were prepared to share this information last night, which was highly classified, " Lieberman said.

Anyway, I'm watching the news conference with Uribe live right now where he, his defense minister, and his armed forces chief are describing the operation. It's very funny to my gringo ears how informal the session is; it has the tone of a chat with Oprah and friends!

Tuesday, July 1, 2008

In a previous post, I asked "Why is McCain going to Colombia?" (He's arriving in Cartagena this evening.) I pointed out that it's an inopportune time for a trip, given that the country's president, Alvaro Uribe, has just made a sudden right turn towards despotism.

Two possible answers:1) He's looking for some fun in the sun in Cartagena, which is one of the continent's most gorgeous cities and is populated by even more gorgeous people. (My guess is that he'll be housed during his stay at the swanky presidential guest house.)

2) The trip was dreamed up by McCain's adviser, lobbyist Charlie Black, as a favor to his many Colombian-tied clients. According to today's NY Times:

Since 1998, the lobbying firm headed until recently by Charlie Black, one of Mr. McCain’s closest confidants, has earned more than $1.8 million representing the Occidental Petroleum Corporation, the leading foreign producer of gas and oil in Colombia. The lobbying firm, BKSH & Associates, has also represented Colombian textile and apparel manufacturers and a former foreign minister and presidential candidate who is also a prominent businesswoman.

According to official filings, Mr. Black, who resigned as chairman of BKSH in March, lobbied Congress, the State Department and the White House on Occidental’s behalf regarding “general energy issues” and “general trade issues” involving Colombia. His list of activities also included winning “foreign assistance for Colombia” and efforts to block an economic embargo against the country, which has a questionable human rights record.

And that's not all. Sam Stein points out that several top McCain have lobbied for Colombia and the free trade agreement. Here's one case:

Peter Madigan, another top fundraiser for the presumptive GOP nominee, was described as a lobbyist who "works for the government of Colombia" to "promote a U.S.-Colombia free-trade agreement" by ABC News. A lobbyist at Johnson, Madigan, Peck, Boland & Stewart, Madigan's clients include Philip Morris, Arthur Andersen, Charles Schwab, Goldman Sachs, Shell Oil and Verizon. His firm, ABC wrote, has "distributed papers defending Colombian President Alvaro Uribe against allegations of ties to paramilitary groups, and promoting the controversial anti-drug program 'Plan Colombia' as achieving 'strengthening human rights.'"

We all know that George Bush has stuffed his administration with lobbyists. But at least the Bush people were able to keep it in their pants until after the election. It looks like the McCain crew decided that it's never too early to start peddling influence. A well-timed visit and photo op with McCain is just what the embattled President Uribe needs right now, and no doubt he'll remember the favor.